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HDFC Life reported mixed performance in Q2FY24 where the company gaining strong traction in HDFC Bank came as a big positive, but the decline in broker channel and muted growth in agency channel spoiled the party, resulting in modest 9% APE growth. On the VNB margin front, a host of positive and negative factors, including increased ULIP in mix, synergy gains from Exide Life, and slower growth leading to reduced cost absorption led to flat margins YoY, minor miss versus our expectations. Management remained confident of delivering mid-teens YoY APE growth in FY24 on adjusted FY23 (~+7% on reported) and flat YoY VNB net margin. In the backdrop of H1 developments, our FY24-26E key estimates remain broadly unchanged (0.5-1.0% cut) and we reiterate our BUY rating on the stock with our Sep-24E target price of Rs740 (implied FY25E P/EV: 2.7x).

Decent operating performance, barring the margin miss

HDFC Life reported a miss on the VNB margin front at 26.2% vs. our expectation of 26.8% for H1FY24. The company reported an APE of Rs53.7bn (+9.3% YoY), which came in slightly lower than our estimate of Rs54.5bn during H1FY24, resulting in a VNB of Rs14.1bn (+9.5% YoY) leading to a 3.4% miss on our estimates. Decent growth in APE was driven by higher than industry growth in the number of individual policies sold at 10%. For H1FY24, PAT at Rs7.9bn grew by 15.4% YoY, in line with our estimates. HDFC Life reported EV of Rs429.1bn for H1FY24 (Emkay: Rs434.2bn), growing 9% over FY23, driven by a positive economic variance of Rs6.5bn during H1FY24. Persistency across cohorts remained broadly stable on a sequential basis. Management believes that investments in distribution channels and increasing productivity gains should foster APE growth during H2FY24.

Multiple moving parts drive a hit on margins, growth journey to continue  

During H1FY24, the share of ULIP in the Individual APE mix increased to 28%, driven by product launches and equity market movements. Traction in retail protection and credit life products continued, offsetting the impact on VNB margins, driven by a higher share of ULIPs and a lower share of non-par products. However, given the slow growth and continued investments in manpower to fuel distribution channels, cost absorption levels remained low resulting in flat margins (Exhibit 2). Going forward, rural penetration, product innovation, increased manpower across channels, improvement in productivity of agents, and increased market share in the HDFC Bank channel are expected to drive steady growth.

Marginal change in estimates; retain BUY with Sep-24E TP of Rs740/share

To reflect H1FY24 performance, we have slightly cut our FY24-26E VNB margin and APE growth resulting in a 0-2% cut in VNB estimates. We retain our BUY rating on the stock, with an unchanged Sep-24E TP of Rs740, implying FY25E P/EV multiple of 2.7x.

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